Weekend Report...US Dollar and US Treasuries Big Picture

Since we covered the many different markets in detail last week I would like
to focus back in on the US dollar and the TLT looking for clues for the big
picture direction. The huge daily swings, in say the INDU last week, makes
it very hard to keep and hold a short or long position unless you're perfect
on your entry point. In a bull market it's two steps forward and one step backward
and in a bear market it's two steps down and one step up. If an entry point
in a bear market is not made in the first part of the two steps down sequence
you'll find your self behind at some point in the trade if the entry point
was made in step two. This is one reason why it's so important to know the
direction of the big trend. Until something changes I believe the US stock
markets are now in a bear market. There are a lot of things that can change
that outlook but for today that's what the charts are suggesting.

Last Friday the US dollar had a nice up day to end the month of January which
was positive. There are two consolidation patterns I'm keeping a close eye
on for the US dollar which is the bullish falling wedge and the H&S consolidation
pattern. This first daily chart for the US dollar is the H&S consolidation
pattern we've been following since December of last year. Even tho last Friday,
the US dollar had a nice up day, the price action still hasn't broken above
the neckline yet. It's getting close but not quite there yet.

This next chart for the US dollar shows the combo bullish falling wedge and
the H&S consolidation pattern being one of the same, a consolidation pattern.
The blue arrows shows the last major impulse move up with several smaller consolidation
patterns that formed.

Last weekend I said I would like to see the monthly candlestick chart for
the US dollar form a white candlestick and a new high for its bull market.
We got the white candlestick but not the new high yet.

The 30 year chart for the US dollar puts our current big base and bullish
falling wedge in perspective. Our current breakout and backtest to the top
rail of the blue falling wedge looks very similar to the one that occurred
during the breakout and backtest sequence of the 1999 blue bullish rising wedge
which took about three months to complete. Tomorrow starts the beginning of
the fourth month since the breakout of the blue falling wedge which is similar
to the 1999 breakout as shown by the red circles.

This last chart for the US dollar is a long term monthly combo chart which
has the US dollar on top and gold on the bottom. As you can see a serious inflection
point is right at hand. If the US dollar can breakout to new highs for its
bull market, gold which is testing the top rail of its parabolic downtrend
channel should decline inversely. Keep in mind this is a monthly chart. It
will be interesting to see what the monthly bar looks like for both the US
dollar and gold come the end of February.

This next chart is the USDU which is the newer version for the US dollar which
is more equally weighted. Several weeks ago it broke out topside from the black
bullish rising wedge. This past week it backtested the top rail and is getting
a bounce. This is a critically important area right here.

Next I want to focus in on the TLT, 20 year treasury bond fund, which is playing
a big role in how I'm looking at commodities, the precious metals complex and
the deflationary spiral we find ourselves in. The first thing we need to know
is if the TLT is in a bullish or bearish mode right now. This first chart is
a daily line chart which shows the TLT breaking out of a pretty nice base at
the beginning of 2016. The 20 and 50 day ema's have a bullish crossover while
all the indicator are positive. I'm going to show you this daily line chart
first so you can see the difference between a bar chart, which can produce
more noise sometimes, vs a line chart. Both charts will be identical except
one will be a line and one a bar.

Next lets look at the weekly line chart for the TLT which shows its bull market
consolidation patterns. Note the strongly slanted H&S consolidation pattern
which has just completed the breakout and and backtest. Note how the backtest
to the neckline found support right on the 30 week ema. All the indicators
are positive.

The long term monthly chart for the TLT shows its complete history which is
a double trendline uptrend channel. Note how our current H&S consolidation
pattern formed right on top of the brown shaded support and resistance zone.
So far so good.

Now I would like to show you why it's so important to have a bullish looking
TLT in regards to being short the commodities and the PM complex. This next
chart is a ratio chart which compares the TIP:TLT on top with the $CRB and
GDX below it. This is where the TLT charts we just looked at above come into
play. I've overlaid the TLT in red over the ratio chart TIP:TLT in black. When
the ratio chart on top in black is rising, it's showing general inflation and
when it's falling deflation. Note the H&S consolidation pattern on the
TLT, which we looked at earlier in red, and the inverse look which shows the
ratio chart in black with a H&S consolidation pattern. As long as these
keep moving in their current direction we should see deflation picking up.
Note how the $CRB and the GDX have behaved during this deflationary cycle.
Also note how the ratio chart in black topped out in 2011 along with the $
CRB index and the GDX. It's not a perfect correlation but close enough to get
the sense of the inverse movement.

This last chart for tonight I'm going to use the TLT to GLD ratio chart on
top and GLD on the bottom. When the ratio chart is rising, meaning the TLT
is outperforming GLD, gold generally goes down. Note the inverse look at the
2008 crash low where the ratio chart made a high and GLD on the bottom made
its low. From the 2008 crash low GLD then went on its near parabolic run to
new all time highs while the ratio chart on top fell to its low. As you can
see the ratio chart bottomed in 2011 while GLD topped out as shown by the red
arrows. Note the three year H&S bottom the ratio chart made on top, with
the head being the 2011 low. The ratio chart on top built out a blue triangle
consolidation pattern as the backtest to the neckline which led to the next
impulse move higher for the ratio chart. That brings us up to our current situation.
Note how the ratio chart on top has formed the blue rising wedge while GLD
on the bottom has formed a blue falling wedge. When the ratio chart on top
breaks out from that blue rising wedge, whichever direction that is, a good
move for GLD will most likely occur. If the charts for the TLT, which I showed
you earlier prove to be bullish, then the TLT:GLD ratio chart on top should
breakout through the top rail of the blue rising wedge. Until something changes
with these ratio charts for the TLT this is the way I have to play the commodities
and the PM complex. All the best...Rambus

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